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Pondera FraudCast

Welcome to the Pondera FraudCast, a weekly blog where we post information on fraud trends, lessons learned from client engagements, and observations from our investigators in the field. We hope you’ll check back often to stay current with our efforts to combat fraud, waste, and abuse in large government programs.

Last week, the Department of Justice announced that they had made the largest “National Health Care Fraud Takedown” in history. In all, the DOJ brought charges against 412 people in 30 states responsible for $1.3 billion in false billings. Those charged included 115 doctors, nurses, and other licensed health care providers.

Many of those busted included operators of clinics that were alleged to be illegally distributing prescription opioids—a subject that we address all too often in this blog. One Houston clinic simply sold the opioids to a room packed full of addicts and drug dealers. Another clinic in Palm Beach, FL recruited addicts by offering them drugs and visits to strip clubs. There were even cases of single doctors prescribing more medications than entire hospitals.

In their press release, the DOJ points out that 59,000 Americans died last year from opioid related drug overdoses. Many of these were from prescription opioids. This is clearly a growing problem in our country and we applaud the DOJ, HHS, and law enforcement for their efforts in this takedown. This, and similar busts, should send a strong message to the bad actors in America’s health care system.

It is important to note, however, that we still have a lot of work ahead of us. As large as these takedown numbers are, one must consider that they still represent only a small percentage of the problem. The government’s own Paymentaccuracy.gov website assigns $96 billion per year in overpayments for Medicare Fee-for-Service, Medicaid, Medicare Advantage (Part C), and the Medicare Prescription Drug Benefit (Part D). So even if all of the $1.3 billion from this bust was falsely billed in one year (which it wasn’t), it would still represent only 1.35% of the total estimated problem.

I, for one, am hoping that this is simply one of many steps in the right direction.

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A few weeks ago, I published a blog post titled “Money Obtained Fraudulently is Rarely Used for Good Purposes”. In it, I made the argument that government fraud is a serious, and at times very ugly problem. Now I no longer have to make that argument because the United States Justice Department is making the argument for me.

Last week, the Justice Department announced the largest health care fraud case it’s ever prosecuted; one that defrauded over $1 billion over the past 14 years. The alleged perpetrators of the fraud are said to have leased private jets and chauffeured limousines. One even bought a $600,000 watch! Remember, this is your tax money we’re talking about. The system ran on a complex network of bribes and kickbacks.

And if that’s not enough, here is one of the schemes they allegedly ran. They “treated” seemingly healthy, elderly people with medications they did not need in order to create addictions which would lead to further treatments. Pure evil. Unfortunately, fraudsters are most active where large amounts of money meet vulnerable populations. This is yet another example of that and more reason for us to do what we do.

In a recent Texas senate hearing, it was revealed that in 2015, the state’s 22 Managed Care Organizations (MCOs) had recovered only $2.5 million of fraudulent payments out of $12.5 billion in claims. That’s about two-hundredths of a percent. Not one of the MCOs recovered even 1% of payments and most reported less than $20,000 in recoveries per full time investigative resource.

These numbers are stunningly low considering the actual amount of managed care fraud, estimated by the American Bar Association to be over $17.5 billion per year. There are dozens of ways to commit fraud in managed care programs including enrolling ineligible, deceased, or incarcerated individuals, collusion and kickback schemes among providers, and billing across MCOs.

In fact, many instances of managed care fraud can be even more insidious than the fraud found in fee-for-service programs. For example, rather than billing for unnecessary services which is common in fee-for service, fraudulent managed care providers are more apt to deny necessary procedures to increase their profits. They also recruit healthy members to bill capitation fees while incurring smaller expenses than those for less healthy members.

As states move more of their Medicaid populations into managed care, it is critical to not pass the responsibility of fraud detection to the MCOs. The current situation in Texas, whatever the causes, should not be tolerated. It is clear that not all MCOs will “play by the rules” and this will inevitably lead to higher capitation rates and less effective care. This is pretty ironic considering that lower costs and improved care were two of the main drivers behind moving to managed care in the first place.

As a company, Pondera is closely following the comments coming from the incoming administration about how they are approaching government efficiency and entitlement reform. Paul Ryan, in particular, has made several statements about the Affordable Care Act (Obamacare), Medicare, and Medicaid. This post provides some of our thoughts around how these changes may affect fraud, waste, and abuse.

While changes are clearly coming to Obamacare, this week Speaker Ryan also hinted at potential changes to Medicare and Medicaid. In Medicaid, where Pondera works with multiple states to detect fraud, Ryan hinted that the administration would consider offering tax credits in place of expanding the number of Medicaid recipients. This is necessary because Medicaid expansion, a byproduct of Obamacare, shares its fate with Obamacare.

While the tax credit idea is interesting, it is certainly not without its own problems. Tax credits, which unlike tax deductions offer dollar-for-dollar savings off bottom line taxes owed, are an attractive target for fraudsters. In fact, the Earned Income Tax Credit (EITC), which offers tax breaks to low income Americans, suffers from a 23.8% improper payment rate in 2016. This is one of the highest rates for any government program translating to $15.6 billion in waste.

On the surface, it seems the administration’s idea may shift much or all of the fraud problems in Medicaid expansion from health departments to state tax collection agencies. Here is one thing we can be sure of though: as long as there are large amounts of money in these programs, there will be bad actors who will attempt to defraud the system. And experience shows us that they will create innovative and technologically-advanced methods to support their efforts.

Medicaid expenditures have nearly doubled over the last decade [1] and states have increasingly looked to a capitated reimbursement model utilizing managed care organizations (MCO) to ensure continued access to quality health care services. The Centers for Medicare and Medicaid Services (CMS) estimate that roughly 80% of all Medicaid recipients currently receive healthcare services via managed care [2]. While the managed care model differs from the fee-for-service (FFS) system in the manner that state Medicaid agencies reimburse for services, the two systems share many of the same risks from a program integrity perspective. One of the shared vulnerabilities that persists is the substantial hurdle states and Medicaid MCOs encounter when determining the eligibility of prospective providers.

Eligibility screening of providers, both upon application and periodically thereafter, is the cornerstone of any successful Medicaid integrity program. This process identifies those prospective and current providers who are statutorily prohibited from participation due to disqualifying events. However, according to a recent report by the U.S. Government Accountability Office (GAO), the screening process is complicated by the reality that the information needed to ensure the eligibility of providers is scattered across numerous databases maintained by different federal agencies [3]. Additionally, many of the state agencies and MCOs assessed by the GAO reported difficulty accessing some sources and cross-referencing potentially disqualified applicants across databases.

This issue became even more pressing recently when CMS issued a long-anticipated rule (CMS 2390-F) that, for the first time, places the responsibility to appropriately screen and enroll all managed care providers squarely on the shoulders of the states [4].

Pondera's core detection tool, FDaaS, provides a ready solution to these challenges by merging these disparate data sources with proprietary fraud algorithms to assist users in identifying those bad actors who present a risk to the Medicaid program.

As a country, we have become accustomed to reading stories about fraud in healthcare, financial services, and government programs. It doesn’t make it right, but it’s certainly not new. Now though, news comes from the American Red Cross that $5 million of Ebola relief funds were fraudulently disbursed on overpriced supplies, fake customs bills, and even non-existent aid workers. These scams will be familiar to regular readers of this blog as they are similar to scams run against domestic subsidy programs. But Ebola relief efforts?

Between 2014 and 2016, Ebola raged through parts of Africa, claiming over 10,000 lives in Liberia, Sierra Leone, and Guinea. In response, the Red Cross collected and distributed over $100 million in aid, while doctors, nurses, and other volunteers risked their lives to save those suffering or at risk from the disease. Into this tragedy, naturally, came the fraudsters who recognized an ideal opportunity given the large amounts of aid money and the necessarily lax controls over disbursements.

Now the Red Cross finds itself having to apologize to donors who realize that 5% of their contributions were stolen. While I don’t know all the details about the Red Cross’s financial controls, I can only imagine how difficult a task it was to make sure money was distributed quickly to only well-intentioned people and organizations.

If anything, I believe this is one more reason for strong enforcement of criminal fraud after it has been committed. Trying to prevent fraud by adding bureaucracy and controls to the funds distribution process would likely add to delays during an emergency. Rigorous investigations and strong prosecutions, on the other hand, could act as a deterrent to future fraud. If not, at least it would prevent these fraudsters from plying their “trade” during other disasters.

Donald Trump recently announced plans for a new child care and paid family leave plan. While I will not be offering any opinions on the plan or on Donald Trump as a candidate, I was interested to see that the announcement sparked discussion of government fraud, waste, and abuse. In this case, the discussion surrounds the Unemployment Insurance (UI) program because Mr. Trump claims that he will reduce fraud in UI by over a billion dollars each year to help pay for his proposed child care plan.

Paymentaccuracy.gov, a government website devoted to providing information on payment inaccuracies, estimates a 10.7% improper payment rate in UI for 2016 resulting in $3.5 billion in erroneous payments. While a small amount of this actually represents underpayments, the majority of the $3.5 billion is waste. The trick, of course, is reducing fraud without delaying benefits to those who are eligible and without spending more money on improving the system than you actually save!

This is where things get interesting. The White House Office of Management and Budget claims that UI program integrity improvements, over the next 10 years, would result in just $150 million a year in savings, or just over 4% of the $3.5 billion. The Congressional Budget Office’s estimates are even worse. They estimate annual savings of $40 million at a cost of $17 million per year, for a net gain of just $23 million per year!

These dramatically different viewpoints between Mr. Trump and government regulators point out two problems when discussing government fraud, waste, and abuse. On the one hand, aspiring politicians and much of the public dramatically underestimate how difficult it can be to detect, investigate, and enforce fraud findings. On the other hand, many government agencies only report on the fraud they know about and estimate savings based on using traditional techniques against those unrealistically small numbers.

Here’s what I can tell you from our experience working in Unemployment Insurance. By combining modern detection techniques with cooperation between states and the federal government, we could net far greater savings than are estimated today. Whether or not other facets of Mr. Trump's program are viable is up to you, the voter, to decide. However, I think we can all agree that there are better uses for those funds than making payments to fraudsters.

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Pondera leverages advanced prediction algorithms and the power of cloud computing to combat fraud, waste, and abuse in government programs.